Record U.S. Production

Crude oil production in the USA rose to 7.181 mbpd last week and the highest level since June 1992. That is more than 1.0 mbpd over the 6.04 mbpd produced in the same week in 2012.

Production in the U.S. is creeping slowly higher with a +30,000 bpd increase after three weeks of no gains. The surge is linked to pipeline outages that restrained production in the prior weeks.

The EIA inventory report showed a +300,000 barrel gain in crude for the week compared to expectations for a +1.9 million barrel gain. Refinery utilization rose slightly to 86.8% but the overall demand for crude oil fell -845,000 bpd. The demand numbers tend to be volatile because of refinery maintenance, temporary outages, changes in product mix, etc.

Refiners should have boosted production last week because the crack spread using Brent crude spiked to $17 compared to the $5 level just three months ago. Those refiners using landlocked WTI like Valero can add another $10 in profit per barrel because of the significantly lower price for Bakken crude. As refiners gear up for the summer driving season they are going to be printing money with gasoline prices at these levels. The EIA predicts gasoline will average $3.63 per gallon this summer compared to $3.69 in 2012.

Gasoline inventories rose unexpectedly by +1.7 million barrels. In theory they should still be declining as the winter blends are phased out. Also, with the -845,000 bpd decline in oil demand it would have meant less refining not more. Gasoline production fell by -185,000 bpd and another reason inventories should have declined. Offsetting the production decline was an increase in imports of 281,000 bpd and that is where our mystery gain appeared.

The numbers supplied to the EIA are volatile. When a refiner fails to deliver their numbers on time the EIA estimates the numbers for that refiner. When the correct numbers arrive the EIA has to remove the estimate and factor in reality. This causes the volatility and the seemingly unrelated dips and spike inside the categories.

Distillate inventories were flat despite an increase in production of +215,000 bpd. Demand declined by -29,000 bpd. Distillate inventories are still -14.5% below year ago levels.

The increase in refinery utilization is unusual for this time of year. It was down at 81% just five weeks ago and now it is approaching 90%. The 86.8% last week is the highest for this week since 2007. Obviously the monster crack spread is fueling this surge in refining.

The green square on production represents a 20 year high. The green square on crude inventory represents a 22 year high. The yellow square on gas rigs represents a 14 year low.

Inventory Snapshot

Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

North Korea

The U.S. and South Korea upgraded the watch status to Watchcon 2 today after the north was seen moving large numbers of short range missiles towards South Korea. Watchcon 4 is peacetime, 3 is threat alert, 2 is a "vital threat" and 1 is war.

The U.S. warned the North it was "skating very close to a dangerous line" in its military preparations. The North warned foreigners in South Korea to consider leaving by April 10th.

The South and the U.S. have observed multiple movements of short and long range missiles towards the south and the fueling of two long range missiles on the east coast. The missiles are thought to have a range of 4000 kilometers. Japan plans on shooting down any missile that come in their direction and Patriot missile batteries have been installed around the capitol.

The U.S. has guided missile destroyers with anti-missile capability on both coasts of North Korea and they are expected to shoot down any missile that is headed for populated territory.

China and Russia have both warned the North to avoid any provocative moves. The North is apparently ignoring them. The new leader has gone too far and has to take some kind of action even if it is only a missile test in order to exit the manufactured crisis with some credibility.

I expect some event over the next several days.

Iran

The talks between the P5+1 nations last week failed and no further talks were scheduled. You can bet Iran is watching the events in North Korea very closely. The North managed to obtain the bomb despite more than a decade of talks and sanctions. This is Iran's goal as well. If they see the North getting away with tough talk and possibility tough actions towards the U.S. then Iran will follow suit. Iran sent officials and scientists to North Korea to observe the last nuclear test in late 2012.

Israel's leaders are positively panic stricken that the world powers will not force Iran to back off its nuclear program. The demand by Netanyahu over the weekend to give Iran an ultimatum with a time limit of "weeks or a month" to halt enrichment or be attacked shows how close we are to a confrontation with Iran.

Once this potential conflict with the North passes the focus will shift to Iran and should carry with it a rise in crude prices. Iran may not have a nuclear weapon but they do have considerable military hardware.

Iran announced the opening of two new nuclear sites on Tuesday. One was a new uranium mine and the other a new processing facility. Bragging about the new sites president Mahmoud Ahmadinejad was taunting the west. He said "You could not block our access to nuclear technology when we didn't have it. How can you take it from our hands now that we have it?" Also, "Iran has gone nuclear. Nobody will be able to stop it. Cooperation with the Iranian nation is the best solution for you." That attitude is far from one that is open to negotiating an end to the crisis.

EIA Short Term Energy Outlook

The EIA released their Short Term Energy Outlook (STEO) for April. This is a monthly report projecting demand, production and pricing trends for the energy markets. STEO April PDF

They are projecting Brent crude will average $108 in 2013. That compared to $112 in 2012 and $119 in February. They believe it will decline to average $101 in 2014. They base this on expanding production of WTI and new pipeline capacity to the Gulf of Mexico. The arrival of large volumes of previously unavailable WTI crude will depress the prices received for Brent on the U.S. coasts.

They believe natural gas will average $3.52 in 2012 compared to $2.75 in 2012. Gas in storage at the end of March was 1.69 Tcf and about 0.79 Tcf below the year ago levels and 0.41 Tcf below the five year average. The EIA believes the current high prices for gas ($4.08) will cost it market share among the electricity generators with the capability to shift to coal. The $4 level is the price where coal is less expensive.

March was 17% colder than previously forecast and the coldest march in more than ten years. This increased gas demand and reduced gas production. Many wells "freeze up" in cold weather and are restarted when warm weather returns.

The EIA said global liquid fuels consumption outpaced production in Q1 resulting in a decline in global inventories of -1.3 mbpd. The EIA expects consumption to rise by +1.0 mbpd in 2013 and +1.3 mbpd in 2014. That is a decline in the prior estimate of -140,000 bpd for 2013 -200,000 bpd for 2014. This projection is revised monthly so the +/- estimate changes monthly are mostly noise.

Global demand rose +700,000 bpd in 2012 to 89.0 mbpd. Estimates are for a rise to 90.0 mbpd in 2013 and 91.3 mbpd in 2014. China accounted for +380,000 bpd of new demand in 2012 and is expected to increase another +450,000 bpd in 2013 and +510,000 bpd in 2014.

Global oil supplies are expected to rise by 600,000 bpd in 2013 and +2.1 mbpd in 2014. Most of that supply growth will come from North America and non OPEC countries.

Unplanned outages in March accounted for a drop of -900,000 bpd in supply. Syria, Yemen and South Sudan were responsible for 75% and Nigeria was also a big loser.

OPEC supply is expected to decline by -400,000 bpd in 2013 and then rebound +500,000 bpd in 2014. The decline in 2013 will come from Saudi Arabia as they back off their high volume output and allow the fields to rest. The increase in 2014 will come from Angola and Iraq if they can get their regional differences worked out.

Total OPEC surplus capacity is currently thought to be 2.8 mbpd. That could rise to 3.4 mbpd in 2014. However, if the global economy were to find some traction that could evaporate very quickly as demand estimates rise to the range of growth of +2.0 mbpd per year.

Market

The market exists to make fools out the most people possible at any given time. The dip on Friday to strong support on the S&P at 1540 was a green light for those waiting for a decent dip to buy. The market has gone straight up ever since.

The Dow closed at 14,800 today with a +128 point gain. The motive power came from a couple sentences in the FOMC minutes that said basically if job growth continued to improve the Fed could begin tapering back on QE within a few months. That was written in response to the strong job gains in February and before the March disappointment. Since jobs are now expected to decline as a result of the sequestration the QE should be with us for the rest of 2013.

It is ironic that a positive affirmation in the minutes turned into a negative event when the indicators turned negative after it was written.

April is historically the best month of the year for the Dow and analysts are already targeting 15,000 over the next couple of weeks.

Be forewarned that the longer we climb without a decent correction the bigger that correction will be. The acceleration of the Dow with triple digit gains is an even more troublesome condition. We are going from overbought to more overbought at a faster rate of speed.

However, the QE from the Fed, BOJ and BOE are being aided by the massive transfer of cash from Europe from depositors who no longer trust the European banking system. The U.S. markets have become the lifeboat in a sea of uncertainty. That suggests we could continue higher in the near future.